Conservative hopes that Britain’s EU membership can be reduced to
participating in a common market are a “fantasy,” a senior Tory minister
will say today.

Damian Green, a Home Office minister, will accuse some critics of the EU of being unrealistic in arguing that the UK can opt out of many EU laws while remaining within its free-trade rules.

He will also warn that moving to leave the EU would damage the UK economy because many major international companies – especially car makers – would no longer invest in the country.

Mr Green will use a speech to Bright Blue, a party think-tank, to challenge the growing consensus among Conservative sceptics about the party’s policy on Europe in the next Parliament.

The so-called “common market or out” position is gaining support among Conservative MPs, including some ministers. Advocates argue that Britain should negotiate a radically simplified membership of the EU, or leave.

Boris Johnson, the Conservative mayor of London this week predicted that David Cameron will soon offer voters that choice in a referendum.

However, Mr Green will suggest that such a choice is unlikely to be on offer, because other EU members will not accept it.

“There is a fantastic vision of an EU which remains a single market, including the UK, but which in all other respects allows the UK to be outside,” he will say. “This is a fantastic vision precisely because it is a fantasy. What is in this for those on the other side of the negotiation?”

Any policy that could take Britain out of the EU would only damage the UK economy, Mr Green will say.

“Ask yourself the simple question. Would we be more or less likely to negotiate a good deal for UK-based companies wishing to trade with Europe if we had pulled out of the EU? And ask yourself another simple question. If you were a company in China or India wishing to set up a base in Europe, would you be more or less likely to choose Britain if we had withdrawn?”

Instead of seeking to move closer to the exit, Britain should “stay in and fight” for a more economically-liberal EU, Mr Green will say.

“The EU is imperfect, irritating, and needs to change badly. There are a number of areas where this Government is fighting to achieve this change. Staying in and fighting is the best way to meet our economic needs.”

The speech is not Mr Green’s challenge to Conservative Right-wingers. Earlier this year, he angered some of his colleagues by saying the party must pass “the Danny Boyle test” and look like modern Britain, instead of focusing on appealing to its traditional supporters.

Some Conservatives believe a tougher line on Europe is essential to retaining the support of the electorate and preventing a disastrous loss of votes to Ukip.

Mr Cameron has indicated he is likely to consult the British people about Europe after the next election, European officials believe he could yet be forced to call a referendum on Britain's membership of the EU before the poll.

A new EU treaty on deeper economic union between eurozone members is “inevitable”, an EU official said yesterday. The treaty could come before 2015, he said.

A new treaty could trigger a UK referendum under a British law that promises a popular vote if any British power is transferred to Brussels.

And even if the treaty does not meet that threshold, a new treaty would spark Conservative demands that Mr Cameron win major concessions for the UK before signing up.

The prediction came as Mr Cameron prepares for a battle against France and Germany to protect the City of London from proposed new European banking rules, to be discussed at an EU summit in Brussels later this week.

Last night it emerged a senior European politician has warned that Britain was leaving itself with “no voice in Europe” by shifting to the margins of the EU.

Wolfgang Schaeuble, the German Finance minister, made the comments during a private dinner with a senior British diplomat and several other guests, according to sources who heard his “harsh” remarks.